Independent participatory media for Iran

There is no calm in sight for the Iranian currency market and Iranians do not expect anything else either.

The results of an opinion poll on the opposition website “Jaras” indicate that 95 percent expect the rial to keep falling against the dollar. These expectations, together with market reactions to the statements and control policies of government officials, are lending more and more substance to rumours of the dollar trading at 30,000 rials.
Under the circumstances, one must ask what is causing this fall in the value of the national currency.

Is it, as the head of the government insists, “disruptors” who have decided to create a fluctuating market in order to foment public discontent? Or is it the economic sanctions, Iran’s rising international tensions and Canada’s severing of diplomatic ties with Iran that have shocked the currency market?

What are the effects of government policies on this unprecedented increase, and why is the market remaining unresponsive to the decisions and statements of those in power?

Are there hidden hands, other than the invisible hands of economy, that have brought the Iranian currency market to this state?

The Dollar Rising Step by Step to the Top

The Iranian collective memory has not yet forgotten when the head of the government claimed the exchange rate for the dollar was unreal. At that time, Mahmoud Ahmadinejad was of the belief that the real value of the dollar was no more than 9,000 rials, but now, (early on Monday, September 10) the real value of the dollar without any subsidies in the Iranian market is 26,000 rials, almost three times what the head of the administration claimed.

And it is not just the dollar that has been on the rise; step by step in recent months, the euro and all other foreign currencies have risen in the open market, despite the steady official rate offered by state banks. The euro has increased by at least 8,000 rials since last year, passing 30,000 rials. There is currently more than a 12,000-rial difference between the open market rate for the dollar and the official bank rate; similarly, the euro is traded at 14,000 rials more than its official bank rate on the open market.

Mahmoud Bahmani, the head of Iran’s Central Bank, said: “The hike in the foreign currency rates in Iran is false and unreal; foreign currency has turned into a commodity, and the people are selling their assets to acquire foreign currency.” In contrast to the head of the government, who had blamed “disruptors”, Bahmani refused to attribute the fluctuations to such sources, saying he has “no information about such a thing, and controlling the market requires the reform of certain mechanisms.”

The Dollar: the Savings Plan for Capitalists

Without delving into the behind-the-scenes story of how foreign currencies have turned into capital goods, Bahmani nevertheless has touched on the reality of the current market. The rise of the dollar against the rial and the difference between the official rate and the open market rate have led some citizens to get into the trading of foreign currencies or to transfer some of their assets into foreign currencies. The long line-ups to buy dollars and gold coins show the public’s appetite in this regard. However, the public is turning to profiteering in the currency market due to the “lack of confidence in investing” in the manufacturing and service sectors.

The government’s economic policies in recent years have led to a crisis in the manufacturing sector. “Lack of security” in the market and the government’s reliance on import policies have made investors uncertain about the future. This has led them to take their capital out of Iran or to turn it into a commodity they believe will hold its value. Meanwhile, all asset liquidity has flowed into the currency and gold market rather than strengthening stocks and the manufacturing sector.

While there is a high demand for the dollar in the domestic market, the government is facing a decline in its foreign currency income due to the international sanctions. The fall in foreign earnings has forced the government to dig into its foreign currency reserves in order to control the market and provide for the rising demand.

Lack of ability or desire?

Government officials have announced over and over again that they are not in any way concerned about the fall in foreign currency earnings and are completely able to control the market. But so far they have not been able to take any action to control the plummeting national currency. This lack of action has been interpreted by some experts and domestic media as a deliberate action or the government’s readiness to accept the current rate of exchange.

The Minister of Labour defended the rise in the price of foreign currencies, which appears to illustrate the government’s latent desire for the hike. Shiekoleslami said: “The difference between the domestic and foreign rates must be eliminated to establish the real value of foreign currency exchange rates. This might create certain problems in the short term but in the long run it will be to the benefit of domestic production, because a rise in foreign currency will reduce imports into the country.”

The minister’s statements about rising foreign currency rates comes at a time when the Central Bank has announced that foreign currency will be rationed so that vital import goods will not face any kind of obstacle. However, the Central Bank’s announcement has been interpreted by experts as heralding a black market and a rise in economic rent.

Ahmad Tavakoli, a Tehran MP, criticized the government’s policies regarding the currency market on Sunday, September 9, saying: “For two weeks now, the government has refrained from providing foreign currency for the market.” He added: “In the last four months, the administration has pocketed a profit of 110 billion rials due to the difference between the foreign exchange rate for necessary import goods and the open market rate.”

These reports and statements appear to indicate the fact that the administration is not at all displeased by the decline of the national currency and, in fact, is benefiting from it.

Things don’t look good.

At this point, there are very few people who bear any doubt regarding the dismal state of the Iranian economy. The government, which has spent most of its foreign currency earnings for imports, is now faced with a steep decline in those foreign currency earnings due to the international sanctions. That decline means a reduction in government revenues and a budget shortfall.

In this midst of all this, the government has chosen the simplest path to raise revenues. It has turned to brokerage and creating income by digging into government foreign currency reserves, a solution that may help the government overcome its budget shortfalls but will further exacerbate the national currency’s downward trend and put more pressure on manufacturers in their efforts to provide capital goods.

The fall in the value of the national currency will also reduce citizens’ purchasing power and lead to inflation. The result of the government’s mistaken policies, which has been intensified by the international sanctions on the country’s financial and oil sectors, will weigh heavily on the national economy and the Iranian household.

Meanwhile, the Ahmadinejad administration will take no action to control the market; instead it attributes the disarray in the market to unknown disruptors, bolsters the rising prices and hides its own role as the main player in the foreign currency market.